VIX Continues To Imply An Increase In Volatility
Opinion: The indexes closed mostly higher yesterday with the exception of the DJI closing fractionally lower. Internals were positive on both exchanges as volumes rose from the prior session. No technical signals of import were generated although several indexes closed at their respective resistance levels. The data dashboard continues to have a somewhat cautionary tone while the VIX continues to imply an increase in market volatility is likely over the near term. Forward valuation of the SPX at a decade high is also worthy of note. As such, in spite of the positive futures this morning, we remain near term “neutral/negative” for the short term and “neutral” for the intermediate time frame.
On the charts, all of the indexes closed higher yesterday with positive internals as volumes rose from the prior session on the NYSE and NASDAQ. No resistance or support levels were violated. The COMPQX (page 3), MID (page 4), RUT (page 4) and VALUA (page 5) all closed at resistance. No sell signals were generated. However, the DJT (page 3) remains on a “bearish stochastic crossover” signal while the VIX (page 9) is worthy of discussion. As seen on the VIX chart, it traded last Wednesday down to 12.00 that has been its historical low point over the past two years. In each case, the market experienced an increase in volatility shortly thereafter to varying degrees. Given the nearly vertical nature of the recent rally and violations of short term uptrend lines, we are of the opinion that the higher probability is for the markets to see said increase in volatility and retracement of some of the gains achieved post the Brexit over the near term.
The data remains mixed but still has a somewhat cautionary tone, in our opinion. While the 1 day McClellan OB/OS Oscillators remain neutral (All Exchange:+9.95 NYSE:+1.43 NASDAQ:+21.78), the 21 day readings are overbought, especially on the NYSE (All Exchange:+97.16 NYSE:+115.12 NASDAQ:+84.67). The WST Ratio and its Composite are bearish at 77.4 and 168.2 respectively while the pros are betting on weakness and long puts via the OEX Put/Call Ratio (smart money) at 1.73. In contrast, the Rydex Ratio (contrary indicator) finds the leveraged ETF traders very leveraged long at 58.5. Thus the data scales have a rather negative tilt.
In conclusion, we remain of the opinion that near term risk/reward is unappealing as the markets are likely to see some consolidation of recent gains.
Forward 12 month earnings estimates for the SPX from IBES of $126.29 leave a 5.82% forward earnings yield on a 17.2 forward multiple.
SPX: 2,119/2,175
DJI: 18,026/NA
COMPQX; 4,971/5,110
DJT: 7,696/8,017
MID: 1,518/1,555
RUT: 1,177/1,219
VALUA: 4,753/4,903